The Power Of The Top 1%

In two well-reasoned and, even better, well-sourced columns this summer, Thomas F. Cooley, the dean of NYU's Stern School of Business and one of my favorite conservatives, tackles the problem of "the beleaguered middle class."

He finds first that labor's share of the U.S. economy hasn't been shrinking, it just hasn't grown anywhere near as quickly as the share controlled by those capitalists at the top 1% of society. He finds that skilled workers have done better than unskilled workers. And he finds that, in the end, we should realize that the economy isn't a zero-sum game. So long as the whole thing is growing, people's lives can improve even if they don't take home the lion's share of progress.

Let's dispense with the notions of class warfare and class envy because both trivialize the concerns of average Americans. The debate over income inequality and its effect on society isn't about the rich having more toys than the rest of us or about an unworthy few living lives of ease while the masses toil. If it were, some noble Robin Hood would have forcibly liquidated the assets of The Real Housewives of Atlanta by now and Paris Hilton would be laying low in a safe house.

No, the problem of inequality isn't how many flat screens one person can buy. The problem is how many senators (or Senate seats) one person can afford. Ultimately, it's about how many lives they can control. It's really a debate about democracy rather than economics.

The power of wealth has been badly abused in America's past. Henry Ford developed a sociology division with his own company that kept tabs on
Ford Motor
employees and even tried to influence their private, off-the-clock behavior. He felt he had both a right and responsibility to treat his employees in an authoritative and paternal way that recalls Russian landowners and their serfs.

Before that, rail car manufacturer George Pullman put his workers in a company town outside of Chicago, referred to them as "my children" and controlled every aspect of their lives by renting them their homes and selling them food through company stores.

Obviously, the situation has improved, but the past shows us how bad things can get. Even in these more enlightened times, employers find reason to investigate the private behavior of employees, even when they're off duty. For one, we have tests for illegal drug use. In most states with "employment at will" laws, an employer can fire an employee for a perfectly legal but perhaps ill-advised private activity like tobacco use. People have been fired for having political bumper stickers on their cars and for writing things on the Internet, even from their home computers.

If people don't like their employers, they can always leave--in principle. But, practically speaking, that choice doesn't usually exist. Kids need to be cared for, and our insane health system means that a lot of people will have no affordable access to basic medicine unless they keep their jobs and the insurance that's provided.

Cooley talks about the growing wage divide between skilled and unskilled workers. But obtaining the skills necessary to enter the skilled work force is quite a struggle for people not blessed with the advantages of wealth.

Fairtest.org breaks down average SAT scores by, among other things, family income. In 2008, a student from a family with income of over $200,000 a year scored a 550 in reading, 570 in math and 552 in writing. At income levels between $80,000 and $100,000 the scores are all well lower, but above 500 in each category. Down at $40,000 a year, none of the averages are above 500; and below $40,000 a year, the scores are all below 450.

To be sure, the SAT isn't the only way student get admitted to college. But it's an important part of the process, and kids from wealthier families clearly have some advantages. Fairtest sent me data going back to 2003, when the test was revamped, and the pattern is the same year after year.

Bob Schaeffer, the public education director for Fairtest, says that "the SAT is a pretty accurate gauge of accumulated advantage." He points out that richer kids, assuming their parents were rich all along, have advantages from before birth, starting with better prenatal care right up through school, where they get better teachers and up-to-date textbooks and, finally, "when they are ready to take the SAT, their parents can buy them 100+ points on the test by spending $1,000 or more for test coaching."

So, better SAT scores mean getting into better schools, learning more skills and accessing the more upwardly mobile professions. Sure, people break out of the cycle all the time, but the deck is clearly stacked. It's just easier to start with money. Even though we talk about "equality of opportunity," we only mean that there aren't laws that prevent the son of a mill worker from becoming a lawyer, not that the son of a mill worker has as good a chance as any at getting into law school.

The effect of wealth on politics is, of course, well-known. Though we regulate lobbying and political donations, the presence of money can certainly influence political debate. Whether it's T. Boone Pickens using his riches to promote the causes of his company Clean Energy Fuel Corp. (House Speaker Nancy Pelosi is also an investor in that) or the Financial Services Roundtable arguing for the interests of
Citigroup
and
Bank of America
, it's well-known that money buys access. The auto workers union plays this game, too, and many think that's why they made out so well in the Chrysler and
General Motors
reorganizations.

We like to think that regulations and contribution limits prevent rich individuals from buying politicians, but we know it's not the case--after all, a person doesn't bundle hundreds of thousands of dollars in political contributions by holding a bake sale.

As Cooley tells us, the people at the top have done better in terms of raising wealth then everyone else. The top 1% does this supremely well, even better than the top 10%. That doesn't happen unless that 1% is exerting some real political influence. We've seen the results of that in both the downward movement of the top tax rates and the favorable tax treatment given to dividends and capital gains. (So Warren Buffett pays a lower percentage of his income in taxes than administrative assistants at
Berkshire Hathaway
.) Only wealthy people or ascetics can afford to own enough stocks to live off dividends, and it's not the ascetics who are calling the shots in America.

We can't equalize economic outcomes, and we can't even build a level playing field, but we can do better to make a system where power is more equal. A strong public health care option would break one bond between employers and employees. We could require colleges (even private universities, since they get preferential tax treatment) to do more to give lower- and middle-income kids an equal shot at a good education, and we can provide more public scholarships, rather than loans, to those students who are trying to acquire the skills they need to thrive. We can take money out of politics entirely by publicly funding elections with free and equal advertising offered by our broadcast, cable, radio and Internet media companies for all federal offices.

Finally, yes, we can tax that 1% more than we do, and they won't flee to Panama to avoid it. I mean, these tycoons are patriots, aren't they? If they really want what's best for their fellow Americans, they'll pay up. And even when they've paid, they'll still live better and have more influence than the other 99%, so what's the problem?